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Reconstruction of Iraq to include development of an advanced payments network.

In the aftermath of regime change in Iraq and the capture of Saddam Hussein, Iraqi bankers are relearning the skills of domestic and international finance. "These folks have been through 30 years where normal lending practices simply did not apply," says George B. Wolfe, deputy general counsel, U.S. Department of the Treasury. "The state banks simply lent money to people who were friends and family of the regime; the small banks lent very conservative loans to a very small private sector."

That's about to change, according to speakers at a recent conference hosted in Washington, D.C., by the Bankers' Association for Finance and Trade (BAFT), an affiliate of the American Bankers Association.

The Central Bank of Iraq recently announced that HSBC, National Bank of Kuwait and Standard Chartered were on track to receive foreign bank licenses in March, with operations slated to begin by the end of the year at the latest. "These banks will transfer needed skills to the Iraqi banking system, expand the banking products and services available to Iraq, and contribute to the modernization of the banking system in Iraq," says Wolfe.

Furthermore, there's room for three additional foreign bank licenses, at least until the limits are lifted in 2009. But a foreign bank license isn't the only way to get started in Iraq.

Iraq has six state-owned banks, including four specialized institutions (e.g., agricultural, industrial, real estate) and 17 private banks, 10 of which have already established lines of credit with foreign banks in order to offer international payments, remittances and letters of credit.

Partnership Possibilities

Under Iraq's banking law, promulgated by the Coalition Provisional Authority (cpa-iraq.org) in September 2003, a foreign bank can also take up to a 50 percent stake in an Iraqi private bank-either existing or new-without having to get a foreign bank license. That's expected to promote the growth and the expertise of the banking sector. "Joint ownership arrangements are under active discussion," says Wolfe. "Foreign partnerships with Iraqi private banks will help modernize the sector, and if history proves true, those who act first will gain a significant competitive advantage."

There are also plenty of opportunities in financial technology. "The state banks are in need of capital, technical training, modern information technology and high-finance accounting systems," says Wolfe. "After 30 years of a dictatorial state economy, credit officers need basic training and lending skills in bank operations, back-office operations and international transactions.

"Also needed is a comprehensive, modern payments system," adds Wolfe. "Much work remains to be done in this area."

Creating a Framework

The beginnings of a supporting legal framework have already been laid down. Under Article 39 of the Banking Law, banks may establish cooperative systems, clearing houses and credit bureaus. The Central Bank of Iraq will provide regulatory oversight.

"We're going to find that Iraq will come out of this with one of the most advanced financial sectors in the entire region," says Bruce B. Proctor, global head, trade product management, JPMorgan Chase (JPMC, New York). "It's going to be very practical and very functional, and it's going to give the Iraqis a tremendous opportunity going forward."

JPMC has been working with the Trade Bank of Iraq to establish sound banking practices for Iraq's reentry into the global financial system, and as such, operates from a unique vantage point. "There's a tremendous chance for you and your clients to not only participate in what is a very large economic opportunity, but I think we all have interests in making sure that this goes well," Proctor told the BAFT audience.

Indeed, a modern financial system in Iraq would have far-reaching effects. "As a society like Iraq moves forward rapidly in terms of democratization, economic growth and so on, and it's seen as a positive example. It will have an impact on the other societies in the region," says Edward S. Walker, Jr., president and CEO of The Middle East Institute, and former ambassador to the United Arab Emirates, Egypt and Israel.